The Downturn? Or is it?

Question

There seems to be two schools of thought circulating. One in which people are saying everything will return to normal once the Coronavirus pandemic ends and one in which they say this is just the start of a major downturn and the virus was the catalyst to make that happen. What are your opinions on the matter as it pertains to real estate?

I was still in high school during the last recession so I have no personal finance experience with recessions. For those of you who went through the last recession, any words of advice? I know all recessions and markets behave differently but on a general basis what would be your plan of action or inaction this current moment?

Chris Mason · Answer

It does seem quite plausible to me that "luxury real estate" (ie, a normal house in San Francisco or San Jose, a higher end house in Oakland, same for East Coast equivalents) might drop a little, or at least appreciate slower. "Jumbo" loans are ridiculously hard to qualify for now, relative to just 3 months ago (Mortgage Credit Availability Index has seen a 60% drop in "jumbo" loan availability, VERY rapid), and widespread availability of "jumbo" loans (with sane/reasonable underwriting criteria) is needed to support those $1m+ SFR price points.

Price points that are Fannie Mae non-jumbo price points will be the least impacted, if at all. The federal gov't is buying unlimited numbers of Fannie/Freddie (but not jumbo!) mortgage backed securities to ensure those loan types remain broadly available and easy to get, driving demand. On the supply side, folks that lost their jobs just got a 3-12 month forbearance gravy train, no rush to sell, limiting supply. A lot of employers are saying that work from home will be permanent. With that in mind (again, I'm using Bay Area towns, translate to your area if/as needed), the twitter or facebook employee (high income employers in my area) is going to go "OK, so I still need to be in the office, but just twice a month. Why rent for $6,000 per month in San Francisco, when I can rent or buy in Sacramento for much less, and just drive in twice a month?" (Again, translate to your locality -- Sacramento is a 1.5-2 hour drive from the Bay Area job centers).

The last 20 years was a story of value jumps and gentrification in core urban markets, less so in the suburbs. I think that trend is going to be reversed. Demand to be in that urban core may be about to decline (or slow), demand in the suburbs may be about to jump up (or accelerate). That switch-a-roo from suburbs to urban core to suburbs has played out a few times in the last century, I think it's about to play out again.

I was speaking with someone yesterday who wanted to buy a $3.5m fourplex in SF or San Jose, my position was that the same down payment they have saved up for that, is ALSO the down payment on 3 or 5 more modestly priced outlying 2-4 unit properties located in towns where those tech employees will be looking to move to once they move away from San Jose / San Francisco. Remember, the QB doesn't throw the ball where the wide receiver is. He throws it where he thinks the wide receiver is GOING to be.

Just one guy's $0.02. I'm certainly open to people saying I'm wrong and why. :)

Chris Mason · Answer

Stake-holders have been spending 12 years pondering "how do we make sure 2008 never happens again?"

Congress is all homeowners. Voters are disproportionately homeowners too.

The president is a real estate mogul.

Between 2008 and 2012, the federal gov't printed about $1.2t.

In the last 2 MONTHS the federal gov't has printed about $4.2t.

So 3 times as much money as came out over the course of 4 years, in just 2 months.

If a crash can be prevented, or mitigated, by government action, that's exactly what will happen. If it can't, then that's that.

To me, that's basically the question. Can a drop in real estate values be prevented by ANY amount of government intervention, inclusive of printing money, placing pauses on evictions/foreclosures, or anything else we can think of, etc? If so, it will. If not, it will not.

I think we will see some deflation in the short term, and inflation in the medium term. Hard to imagine $4.2t not causing inflation once that money hits 'main street.' Borrowing money at a fixed interest rate (such as a mortgage, but not JUST a mortgage or mortgages) is a hedge against inflation.

Jonathan Twombly · Answer

@Chris Mason Thanks for your posts above.  I think you made some really good points.

I differ a bit in that I actually think that the more pressing problem is deflation. The money flooding into the system is not coming on top of a normal economy and increasing the money available to consumers (except for those low-wage unemployed earners who are temporarily doing better on unemployment - and they were given that money to prevent a wave of home mortgage and rental housing defaults).  It's replacing money that has suddenly been withdrawn from the economy and would have been completely destroyed.On top of that, whatever actually happens with Covid, it will accelerate deflationary trends, particularly the adoption of labor-saving technology. This happens in every recession. And, what we saw coming out of the last recession over time was the eventual creation of a lot of jobs, but 40-50% were very low-wage jobs.  I would expect this trend to continue and accelerate.Even if we have a successful de-coupling with China's supply chains, it doesn't mean that all those jobs are coming back to the US. A large part will go to Mexico, Vietnam, Cambodia, Bangladesh, etc. - wherever labor is cheapest.  And a lot will go to robots and computers in the US.

Already, you see Fedex, UPS, Uber, etc. looking to go driverless. UPS wants to fly its entire fleet of aircraft remotely from a central location with 10 people.

Many businesses are already gone and won't come back.  And, as long as some percentage of the population remains wary of crowds after the economy opens up, it will have a depressive effect on the economy, and that will ripple through the economy negatively.

It's hard to recall now, but if you look back at the Great Financial Crisis, you see many economists and politicians denying that we were in a recession, and then denying the recession would last long; denying there was a housing bubble, and then denying that there was a housing crash.

I think it's just too early to make any solid predictions, other than long-term trends continuing or accelerating where the driver is cost savings.

Though I would buy a heavily discounted multifamily property a block away from an Amazon distribution center right now. . . .

Bill Goodland · Answer

@Drew Lamb honestly nobody knows. Will the economy be negatively affected by an overall decrease in GDP? Yeah probably. But there’s also been so much quantitative easing to weather this storm that I don’t expect anything cataclysmic to occur. And even if it does, if you’re buying good enough deals at below market with equity built in, you’re pretty well protected. Far more wealth has been made by understanding, mitigating and living with risk than has ever been made waiting for a crash that may never come

Jesse S. · Answer

@Chris Mason thanks for your insights, always learn a couple of things.

To the part on what government can't control, they can't really control the layoffs from these tech companies and unlike other industries they can't even give them handouts.

Companies like Uber are laying off thousands, and some of the big tech have frozen hiring. To add to that, at big companies you have hundreds of people leaving monthly that all of a sudden aren't because it's risky to switch jobs right now so there's even less hc to hire more. Uber was San Francisco's 5th biggest employer.. Salesforce being first has also frozen hiring.

Getting funding as a startup has been difficult since the whole WeWork debacle so even startups are not getting a lot of money if they are getting any which means less amount of headcount.

There's suddenly more supply of tech workers than demand. They aren't going to continue paying crazy rents and likely move out. The amount of new talent coming will also dramatically slow down. Those still working are going to try to move out as tech companies are more open to remote work.

The over leveraged airbnb folks are in trouble too because travel is not what it used to be. They may postpone their mortgages for a while but than what? It's still going to not be the same so they are fighting for customers, causing a decrease in airbnb prices (whereas it used to be the other way around). The hotels are also in trouble and will continue to lower prices and offer deals.

All of these combined are going to temporarily cause housing here to go down but probably not for too long.

I think overall the market here is going to end up going down.

Anthony Angotti · Answer

Hang on to your cash, have good savings in place, and stick to sound investing principles.

It seems like there will be a correction, however a crash doesn't seem to be supported based on a lot of what I'm seeing and how the response has been. Especially considering it was a forced shutdown that took down the economy a bit currently and not one as a result of poor regulations or poor fundamentals of businesses.

I believe there will be a correction, but not to the level of the prior housing crash. Additionally those looking for deals because of this I believe will be disappointed to find that most areas don't swing heavily to buyer's market territory. If anything I think it will be more of a balanced market, but not a full on buyer's market. Perhaps that will be incorrect for the single family space, but for multifamily residential buildings that are owned primarily by investors most of the one's I know in my market say that they are doing better than all of their other investments. So no reason to sell.

Jonathan Twombly · Answer

Well, if unemployment persists when it runs out, it certainly won’t help the economy!

Drew Lamb · Answer

@Jonathan Twombly yes, these are unprecedented times for sure. I only wonder how the economy will fair once the $600 a week in added unemployment benefits from the federal government is over.

Michael D. · Answer

@Drew Lamb The biggest variable in your question is when. We don’t have a vaccine and it will take time to distribute said vaccine widely enough that the world economy can return to normal. Until that time we are going to have to deal with periodic outbreaks. And some economic areas will never return to the way they were before due to new regulations, automation, and changed consumer preferences. My guess is at least two years before it is “over”, probably closer to three or four.

Related to real estate? Since real estate wasn’t the cause it won’t drop like ‘08, but job losses and decreased wages are going to exert downward pressure on rents and purchases as people can afford less. One area I would buy into if I could afford it would be warehouse space. Companies that went hard into just-in-time supply chains are going to come around to keeping inventory on hand to ride out interruptions.

Drew Lamb · Answer

Stack Cash* Sorry lol

The Downturn? Or is it?

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